Letters to Lorna

Letters to Lorna

(Filed: 19/02/2003)

How to satisfy the Inland Revenue

I am already giving sums of money to my children from capital to help them avoid inheritance tax, and am now considering gifting extra amounts out of income. I appreciate these must be derived from income rather than capital and that they must not affect my standard of living.

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I feel I could successfully argue my case with the Inland Revenue but, as no annual returns are required, it occurs to me that any questions arising will have to be answered by my executors and beneficiaries before exemption is approved. Is there any standard documentation with which to satisfy the Revenue?

John West Winchester, Hants

The usual way round this problem is to make regular payments by standing order into savings accounts in the children's names.

Alternatively, if the money is not for their immediate use and is intended for, say, grandchildren's school fees, you could take out a series of savings-type life policies, written in trust, for the benefit of the children or grandchildren. The Revenue is unlikely to query such an arrangement unless the sums are particularly large in relation to your income.

Birmingham Midshires mystery

I was concerned to note that Birmingham Midshires did not appear in the table of building societies' capital ratios published recently in The Sunday Telegraph. They tell me that they are not a building society but a subsidiary of Halifax, but won't give me the value of their capital ratio. Should I be concerned?

A H Falkner Kenilworth, Warwicks

If a bank, building society or credit union goes bust, the Financial Services compensation scheme repays the first £2,000 in full, and 90 per cent of the next £33,000, so the maximum payout is £31,700.

I do not think you are in danger of losing your money but if you are worried, why not split your savings so that you do not have more than £35,000 with any one bank or building society?

Birmingham Midshires was bought by Halifax, which was taken over by Bank of Scotland and became HBOS.

In search of a 100pc mortgage

My daughter, 25, has found a flat for £48,000. She earns £15,000 a year and has no savings, and I am unable to help her as I have been widowed for 12 years and live on benefits. Could she get a 100 per cent mortgage? She has a good job with the local authority.

P J Kandy Carlisle, Cumbria

Several lenders will consider 100 per cent loans but she would get a better rate of interest if she had a 5 or 10 per cent deposit. Scottish Widows has a "graduate" mortgage at an initial discounted rate of 3.5 per cent, reverting to 5.4 per cent after the discounted period.

Royal Bank of Scotland will lend 100 per cent at a discounted rate of 4.45 per cent. John Charcol, the mortgage broker, has details of these and similar deals. Call 0800 718191 or visit www.charcolonline.co.uk.

Getting due compensation from Widows

On august 11 last year, a reader wrote querying the amount of compensation he received for the mis-selling of a Scottish Widows "back-to-back" versatile endowment policy, provided by Frizzell.

You advised him to ask whether he had been put back into the position he would have been in had he been sold a more suitable product.

I too was advised to invest in the same product in 1993, but being further down the alphabet than your reader, had not at that stage received the offer from Frizzell to return the commission paid to them at the time of the investment.

But for your column, I would probably have accepted the returned commission and left it at that. As it is, I have this weekend received compensation, after tax, of several thousand pounds.

I should add that my wife received the money as the policy was written not on joint lives but on my life, with her as "grantee". She also received the windfall when Scottish Widows was bought by Lloyds TSB.

If this is common practice, it must have caused disharmony in some households. Thank you very much for your help.

Robert W Wootten

What is depressing about this story is that financial firms still try to pull the wool over clients' eyes. When will they learn?

I am glad that you were able to obtain proper compensation - even if your wife received the money. Hopefully she has at least taken you out to dinner on the proceeds.

How capital gains works on rental income

My wife and I jointly own a house which is let unfurnished. The property is registered as jointly owned and the tenancy agreement names both of us as landlords. Next year we will be 65 and my wife's state pension will cease.

She will thereafter be unable to use her full tax-free allowance unless all the rental income is declared as hers. Is it possible to declare the rental income as hers without a lot of hassle, possibly involving changing the registered ownership of the house?

From the capital gains tax point of view, we should like to own the property jointly. Is it permissible for the ownership and rental income to be divided differently?

T Michael Jarvis

Sadly, no. If the property is in joint names and there is no deed setting out the proportions in which it is owned, the Inland Revenue will consider the two of you to own it in equal proportions. Any rental income will be divided in the same way - whatever the rental agreement says.

The only way round this is to get a solicitor to draw up a deed setting out the division of ownership with, say, you owning 10 per cent and your wife 90 per cent. Transfers between husband and wife are exempt from CGT.

Depending on the acquisition price and the potential capital gain, it should be possible to divide calculate the proportion of ownership to enable both partners to make use of their annual CGT exemption when the property is sold.

This may mean dividing it so that you own, say, 20 per cent and your wife 80 per cent. But if you intend to keep the property, the long-term benefit of annual income tax relief on the rental income if your wife owned 100 per cent could outweigh the benefit of using both partners' annual CGT exemption.

Without exact figures I cannot be specific but an accountant could advise you for, say, a one-off £200.

When is a gift exempt from inheritance tax?

In a recent edition of The Telegraph there was an article which said both husband and wife could each respectively give £3,000 in a tax year to their son and daughter, without these payments being subject to inheritance tax.

Could they both give £3,000 to the same child and still avoid an IHT bill if one of them were to die?

F Hansen Ashtead, Surrey

An individual can give away up to £3,000 in any tax year to anyone and it is outside their estate for inheritance tax purposes. Both partners in a marriage could give £3,000 to the same son and it would be exempt from IHT.

You can also give away money out of "normal expenditure", provided it does not affect your lifestyle. The most obvious use of this is to take out an endowment policy for the benefit of children or grandchildren.

Because it is a regular payment, it can be deemed normal expenditure. It is worth remembering most gifts are exempt from IHT if the donor lives for a further seven years.

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Letters for Lourna Bourke's Money Surgery should be sent to Money, Salters Hall, 4 Fore Street, London, EC2Y 5DT. They may also be sent by fax to 020 7638 0180.

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